Democrats Weigh New Tax on Investment Income

WASHINGTON -- House and Senate negotiators are considering applying for the first time the Medicare payroll tax to investment income as part of a compromise to pay for a health overhaul.

The extra Medicare tax would apply only to the wealthy and could allow congressional Democrats to reduce the sting of a tax on high-cost insurance plans, said Democratic aides and others briefed on the negotiations.

Labor leaders complained directly to President Barack Obama on Monday about the tax on high-value plans, which would hit some union members who have negotiated generous health benefits.

At least one union is threatening to oppose the underlying legislation if the tax remains, and the president of the AFL-CIO suggested in a speech that Democrats who took unions for granted risked losing support in congressional elections later this year.

"Politicians who think that working people have it too good ... are inviting a repeat of 1994," when Republicans took control of the House after decades in the minority, said AFL-CIO chief Richard Trumka.

Republicans have criticized Democratic plans for higher Medicare taxes, saying the health bill already includes too many taxes and creates a big new government program at a time of large federal budget deficits. "If Democratic leaders want to increase Medicare taxes, the revenue should go to Medicare ... not for other government spending," said Sen. Chuck Grassley (R., Iowa) late last year.

A Republican aide said Monday that including investment income in Medicare taxes "unnecessarily undermines the simple straightforward structure" of the current system.

Currently, the Medicare tax applies only to wages, without any limits. The 2.9% tax is divided in half, with workers and employers each paying 1.45%. The health bill passed by the Senate would raise the worker contribution to 2.35% for individuals making more than $200,000 a year and couples making more than $250,000 a year.

Under the proposal now being considered, people making more than those amounts would also pay the Medicare tax on dividends and other income from investments, the people familiar with the talks said. Income from pensions and retirement accounts, including 401(k) accounts, would be exempt.

People familiar with the talks cautioned that the idea was still in the study stage along with other ideas, and that it was too early to say whether it would find favor among Democrats.

A version of the broader Medicare tax, put forward by Sen. Debbie Stabenow (D., Mich.), would raise $111 billion over 10 years, according to a December estimate from the congressional Joint Committee on Taxation.

The proposal would also bring the Senate closer to the House version of the health bill, which contains a 5.4% income surtax on the wealthy. That surtax would apply to income above $500,000 for individuals and $1 million for couples.

The extra Medicare tax might bring in enough to scale back the tax on high-cost health plans and still have some left over to beef up subsidies to help the poor buy health insurance -- a key goal of House negotiators in the talks.

"It's an obvious compromise," said Chuck Marr, director of federal tax policy at the left-leaning Center on Budget and Policy Priorities. "They need to find something between the House and Senate versions. The advantage of this proposal is that, like the House surtax, it is broad-based."

Mr. Obama has made clear that he supports a new tax on high-cost health-insurance plans, both to raise money and to discourage high health-care spending associated with these products. The Senate bill includes such a tax, although the House version doesn't.

One union said Monday the tax issue was important enough to kill the bill.

"We cannot support legislation that looks anything like the Senate bill, and I think Democrats proceed at their own peril," said Tom Buffenbarger, president of the 640,000-member International Association of Machinists. "If this goes through, the wrath of membership will be felt Nov. 2."

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